No. of Recommendations: 2
if you think your trades can improve CAGR by 2 to 3 per cent versus LTBH, then they're probably worth doing.
Improve the CAGR by 2%? Or by adding 2% to the CAGR?
IOW, 10% --> 10.02? or 10% --> 12%?
I was just surprised at how small the improvement in CAGR needed to be for the taxed port to keep up.
$100 invested for 20 years, CAGR 10%, CapGain tax 15%
Pay tax each year:
calc 100 * (1 + (.109 * 0.85)) ** 20
The answer is: 588.33
Pay tax at end:
Before tax
calc 100 * (1.10 ** 20)
The answer is: 672.75 (572.75 gain)
After tax
calc 100 * (1.10 ** 20 - (5.72 * .15))
The answer is: 586.95
Conclusion:
Paying tax every year, you need to get 10.9% CAGR
to equal 10% CAGR for buy&hold.
Indeed, the required additional gain is less that I expected, only about 9% greater CAGR. An extra 0.09%
Of course, there is trading friction that will also come into play. You pay that on every trade. Annually for one case and only once in the other.
